Madoff's Ponzi Scheme

There is no end to bad financial news. The latest is a good old-fashioned ponzi scheme resulting in losses of about $50 billion that took place over decades. Basically a ponzi scheme is just a high rate of regular return given in order to entice new investors whose money in turn is used to pay existing investors without creating any underlying earnings for the payout. This time run by Bernard Madoff, an investment banker who formerly served as chairman of the board of directors of NASDAQ. Madoff was turned in by his own sons to the F.B.I. and charged with fraud.

The timing of Madoff's undoing could not be worse, but not surprising. Madoff's classic ponzi scheme depended on continued new investments. With the markets in turmoil, those new investors must have been impossible to bring into his venture. Today marks continued trouble for the stock market and manufacturing shows an even worsening economy. Even Apple has been downgraded to "neutral" by Goldman Sachs Group Inc. from a previous "buy" status. Add to all of this the lack of resolution concerning the prospects for the U.S. auto manufacturers.

Madoff's scheme is set to further erode investor confidence. Although we might call for increased investor due diligence, many thought that Madoff was a safe player. Many large banking institutions from around the world have announced billions in losses on the Madoff scheme already. What's to come? For starters, I suspect we will see more calls for Congressional hearings and even more calls for greater regulation of the investment community.

— JSM